Tax laws provide benefits for certain kinds of income and allow special deductions and credits for certain kinds of expenses. The alternative minimum tax (AMT) attempts to ensure that anyone who benefits from these tax advantages pays at least a minimum amount of tax.
The AMT is a separate tax formula that eliminates many deductions and credits, thus increasing tax liability for an individual who would otherwise pay less. If your taxable income for regular tax purposes, plus any adjustments and preference items, is more than the AMT exemption amount, you must calculate tax using both the AMT and regular tax formulas and pay the higher of the two amounts.
The Tax Cuts and Jobs Act of 2017 increases the AMT exemption amounts and raises the phase-out thresholds. It also permanently indexes the exemptions for inflation. Today, with these changes from the new tax law, the AMT will primarily affect high-income households, as it was originally intended. The following increase your risk of triggering the AMT:
- High income
- Interest income from private activity bonds
- Large capital gain
- The exercising of Incentive Stock Options (ISOs)
- Claiming the standard deduction.
Under the AMT, individuals are taxed at rates of 26% and 28% on the amount of taxable income above the exemption amounts. The American Taxpayer Relief Act provides a permanent “patch” for the AMT. In 2019, the exemption amounts are $71,700 for single filers, $111,700 for married couples filing jointly, and $55,850 for married couples filing separately.
Consult with us to determine if the AMT will affect you.